The effect of financial leverage on real and accrual-based earnings management

Past research has documented a substitution effect between real earnings management (RM) and accrual-based earnings management (AM), depending on relative costs. This study contributes to this research by examining whether levels of (and changes in) financial leverage have an impact on this empirically documented trade-off. We hypothesise that in the presence of high leverage, firms that engage in earnings manipulation tactics will exhibit a preference for RM due to a lower possibility—and subsequent costs—of getting caught. We show that leverage levels and increases positively and significantly affect upward RM, with no significant effect on income-increasing AM, while our findings point towards a complementarity effect between unexpected levels of RM and AM for firms with very high leverage levels and changes. This is interpreted as an indication that high leverage could attract heavy outsider scrutiny, making it necessary for firms to use both forms of earnings management in order to achieve earnings targets. Furthermore, we document that equity investors exhibit a significantly stronger penalising reaction to AM vs. RM, indicating that leverage-induced RM is not as easily detectable by market participants as debt-induced AM, despite the fact that the former could imply deviation from optimal business practices

The option market reaction to bank loan announcements

In this study, we examine the options market reaction to bank loan announcements for the population of US firms with traded options and loan announcements during 1996-2010. We get evidence on a significant options market reaction to bank loan announcements in terms of levels and changes in short-term implied volatility and its term structure, and observe significant decreases in short-term implied volatility, and significant increases in the slope of its term structure as a result of loan announcements. Our findings appear to be more pronounced for firms with more information asymmetry, lower credit ratings and loans with longer maturities and higher spreads. Evidence is consistent with loan announcements providing reassurance for investors in the short-term, however, over longer time horizons, the increase in the TSIV slope indicates that investors become increasingly unsure over the potential risks of loan repayment or uses of the proceeds

Clustering measure-valued data with Wasserstein barycenters

In this work, learning schemes for measure-valued data are proposed, i.e. data that their structure can be more efficiently represented as probability measures instead of points on $\R^d$, employing the concept of probability barycenters as defined with respect to the Wasserstein metric. Such type of learning approaches are highly appreciated in many fields where the observational/experimental error is significant (e.g. astronomy, biology, remote sensing, etc.) or the data nature is more complex and the traditional learning algorithms are not applicable or effective to treat them (e.g. network data, interval data, high frequency records, matrix data, etc.). Under this perspective, each observation is identified by an appropriate probability measure and the proposed statistical learning schemes rely on discrimination criteria that utilize the geometric structure of the space of probability measures through core techniques from the optimal transport theory. The discussed approaches are implemented in two real world applications: (a) clustering eurozone countries according to their observed government bond yield curves and (b) classifying the areas of a satellite image to certain land uses categories which is a standard task in remote sensing. In both case studies the results are particularly interesting and meaningful while the accuracy obtained is high.Comment: 18 pages, 3 figure

Near-field intensity pattern at the output of silica-based graded-index multimode fibers under selective excitation with a single-mode fiber

Abstract: Selective excitation of graded-index multimode fibers (GIMMFs) with a single-mode fiber (SMF) has gained increased interest for telecommunication applications. It has been proposed as a way to enhance the transmission bandwidth of GI-MMF links and/or create parallel communication channels over the same GI-MMF. Although the effect of SMF excitation on the transmission bandwidth has been investigated, its impact on the near-field intensity pattern at the output face of the GI-MMF has not been systematically addressed. We have carried out an analysis of the near-field intensity pattern at the output face of silica-based GI-MMFs excited by a radially offset SMF. Simulation results exhibit all of the features displayed by experimental ones. It turns out that differential mode attenuation and delay, full intra-group mode mixing, and small deviations in the refractive index profile of the GI-MMF do not affect the overall shape of the near-field intensity, which is determined by the radial offset of the input SMF. This can be exploited in mode group diversity multiplexing links. The effect of defects in the refractive index profile, such as a central dip or peak, is also examined

Accounting quality, information risk and implied volatility around earnings announcements

We examine the impact of accounting quality, used as a proxy for information risk, on the behavior of equity implied volatility around quarterly earnings announcements. Using US data during 1996–2010, we observe that lower (higher) accounting quality significantly relates to higher (lower) levels of implied volatility (IV) around announcements. Worse accounting quality is further associated with a significant increase in IV before announcements, and is found to relate to a larger resolution in IV after the announcement has taken place. We interpret our findings as indicative of information risk having a significant impact on implied volatility behavior around earnings announcements

Earnings management in firms seeking to be acquired

Empirical evidence regarding accrual-based earnings management around mergers and acquisitions has been setting-specific as far as target firms are concerned. This might be due to the fact that target firms cannot always anticipate an acquisition proposal, and thus lack the motive and the time necessary to manage their earnings in order to facilitate or impede the deal. In this paper, we provide clear evidence of downward earnings management by a sample of target firms that have both time and motive to engage in such actions. These are firms that publicly announce their intention to be acquired. Publicly ‘seeking a buyer’ represents a rather unusual corporate event, and we find that these firms engage in downward earnings management in the years surrounding the ‘announcement year’. To some extent, this result is explained by overrepresentation of low performance and growth among these firms, and it can be interpreted under alternative explanations. Furthermore, we show that such downward earnings management negatively affects the probability for a ‘seeking buyer’ firm to secure an acquisition within a reasonable amount of time, a possible indication of efficient diligence by prospective buyers having a preference for firms ‘seeking buyer’ with no informationally obscure earnings

Strategic entry and market leadership in a two-player real options game

We analyse the entry decisions of competing firms in a two-player stochastic real option game, when rivals earn different but correlated uncertain profitabilities from operating. In the presence of entry costs, decision thresholds exhibit hysteresis, the range of which is decreasing in the correlation between competing firms. A measure of the expected time of each firm being active in the market and the probability of both rivals entering within a finite time are explicitly calculated. The former (latter) is found to decrease (increase) with the volatility of relative firm profitabilities implying that market leadership is shorter-lived the more uncertain the industry environment. In an application of the model to the aircraft industry, we find that Boeing's optimal response to Airbus' launch of the A380 super carrier is to accommodate entry and supplement its current product line, as opposed to the riskier alternative of committing to the development of a corresponding super jumbo. © 2002 Elsevier B.V. All rights reserved

Design considerations for a transparent mode group diversity multiplexing link

Mode group diversity multiplexing (MGDM) is an optical multiple-input-multiple-output technique that aims at creating independent communication channels over a multimode fiber, using subsets of propagating modes. This letter deals with the analysis of an MGDM point-to-point link, transparent to the transmission format. The geometry of a mode-group selective multi/demultiplexer is optimized in order to minimize the crosstalk among the channels. The power penalty is calculated when a zero-forcing algorithm is used to mitigate the crosstal